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Tax Tip 23: The 6 year Absent from Main Residence Rule

Discussion in 'Accounting & Tax' started by Terry_w, 20th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The 6 year Absent from Main Residence Rule


    Section 118-145 of the Income Tax Assessment Act 1997 allows a taxpayer to keep treating their main residence as their main residence while absent for up to 6 years and while renting the property out.


    The taxpayer could rent, negative gear, claiming all expenses as per normal yet sell the property within the first 6 years of it being rented and not have to pay any capital gains tax.


    A common question is how long does person need to live in a property before it becomes the main residence. There is no minimum requirement listed in the law.


    This section cannot be used to claim on a property until it has become your main residence. You cannot be absent until after you were present.


    Also you cannot be absent from a property is you are still living there so it won’t apply to renting out rooms or part of a residence.


    Properties located overseas are also subject to CGT in Australia and this provision can apply to overseas property.


    Vacant land will not qualify either as a ‘dwelling’ is needed for the exemption to occur.


    See the legislation at http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.145.html
     
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  2. chylld

    chylld Well-Known Member

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    At the risk of stating the obvious: if you move out of one property and into a second and treat the second as your main residence, do you then lose the exemption on the first property?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No you don't.

    But when you eventually sell one of them at that point you have to decide which one to treat as the main residence as you can only count one property as the main residence at any one time.
     
  4. chylld

    chylld Well-Known Member

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    So say you live in property #1, move to property #2 (#1 gets rented out) then decide to sell property #1 after 2 years.

    If you sell property #1 as your main residence, you are exempt from CGT? However later on when property #2 is sold, it will not be exempt from CGT as it was not the main residence during that 2-year 'overlap' period?
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes property 2 can't be exempt for any overlap period as you already had a main residence and claimed it.
     
  6. wategos

    wategos Well-Known Member

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    Some people move out, rent out former main residence but never declare it as an IP (just pocket the rent), then move back in when selling it so never appears on ATO radar and tax is never paid on the capital gain or the net rent received.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Incidentally, the 6 years only applies if the property is income producing if it is not then it could continue to be exempt.
     
  8. chylld

    chylld Well-Known Member

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    How does one declare a property as an IP?

    So you still have to physically move back in just before selling in order to take advantage of the 6-year exemption?
     
  9. wategos

    wategos Well-Known Member

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    Declared by putting it on the tax return. What they are doing is illegal.. its just that the ATO cant detect it. Fully paid off former residences rented out tax free, never appearing on any tax return. Then they move back in and sell it CG free also.
     
  10. chylld

    chylld Well-Known Member

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    So if you've moved out of a property, rented it out, and claimed tax deductions on that property, you can no longer apply the 6 year CGT exemption to it?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    you can
     
  12. chylld

    chylld Well-Known Member

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    Thanks Terry, slightly less confused now... will leave this in the capable hands of my accountant when the time comes :)
     
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  13. dna4

    dna4 Member

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    if i bought my first property 2010 and we live there for 2 years .Before we move out the bank did the valuation - my accountant said to keep the documents to work out the CG later down the track.

    Then we bought another one on 2012 and move into it while rent it out the first property.

    Now 2015 - we looking into selling the first property.

    Will I pay the CGT ? I couldn't recall that I put any nomination of primary residency in any of my tax return.
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Depends. Assuming the main residence exemption could apply to both properties than it would be optional. You don't have to pay CGT on the first one if you decide to use the main residence exemption on it.

    But you should plan carefully as this would mean you cannot use the main residence exemption on the second one at the same time.

    What you should do is work out if there would be any tax to pay on the first one. If not then no use in claiming the exemption.

    i.e. Both could be CGT free
     
  15. dna4

    dna4 Member

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    Yes there is capital gain hence i assume it will have tax implication of it.

    Thank for the reply terry- its pretty interesting that my accountant told me that i will pay CGT on my first ppty since i already have two properties and resides on my second ppty.

    My understanding that i have 6 years from 2010 (move out date)to treat it as primary residence Hence no cgt payable.

    Regarding planning on which properties totreat as primary residence - if i claim the 1st ppty as primary and i couldnt nominate the 2nd ppty as primary residence forever, is it right?
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Any captial gain can be reduced by the costs incurred. This is why you need to do the calcs as their may be no taxable capital gain. Don't forget you can claim the interest and costs while you were living there too.

    2nd property would qualify for the main residence exemption after the first is sold.
     
  17. chylld

    chylld Well-Known Member

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    If you were to live in the first property for 5 years, then rent it out for 5 years, then sell it... how would the 6 year rule apply to CG as well as claiming interest/costs over that 10 year period? (Assuming a valuation was done when you moved out)
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    could be totally exempt.
     
  19. Bran

    Bran Well-Known Member

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    Terry,

    You have commented on my situation before, with successive OO purchases which then become IPs (I just never sell).

    Is the CGT exemption for 6 years enough for anyone to actually sell in this time frame just to get the exemption? It would mean getting back in the market with the associated costs, but still arguably worth it. If you sell at 7, 8 years, do you lose the whole CGT exemption or is it then pro rata after the six years?

    B
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you go over 6 years of absence then there will be apportioning involved so you will still benefit. I will do an example.
     
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